Live mint: Shyamal Banarjee: Friday, February 19, 2016.
Earlier this week, the story of bad loans in the Indian banking sector took an interesting turn with the Supreme Court (SC) asking the Reserve Bank of India (RBI) to disclose names of companies that have defaulted on loans over Rs.500 crore.
So far, the SC has asked that these names be submitted in sealed envelopes within six weeks, but the events in court have once again raked up the debate over transparency. How transparent should the regulator be about its interactions with those it regulates—the banks? Should it protect the interests of depositors or institutions that hold the deposits? Will greater disclosure harm the system?
There are two ways to ways to look at this issue—the intuitive view and the legal view.
The intuitive position
The intuitive position, particularly in the context of the current discourse may be to say that ‘more is better’ when it comes to disclosures about bank defaulters.
Indian banks are heavily burdened with bad debt and after delaying recognition for years, the RBI is now forcing lenders to recognise stressed assets and provide for them. To facilitate this, it has now put in place the Central Repository of Information on Large Credits. This database, which holds information about large borrowers and their repayment track record, is circulated within banks to ensure that they lend to these companies with their eyes wide open. Further, the RBI, in the past few months, has put together a list of about 150 accounts that have shown persistent signs of stress and asked some banks to reclassify these accounts as non-performing assets.
The short point is that over the past few years the RBI has collected substantial information on companies and promoters that may be consistent points of stress for the banking system. Since the information is now available, maybe the RBI should consider making selective disclosures about large and persistent defaulters.
It is important to mention here that there is some information available in the public domain. Credit Information Bureau (India) Ltd, or Cibil, has on its website a list of wilful defaulters against whom court cases have been filed. But this information is difficult to sort, and getting a clear and consolidated view of who has defaulted on how much with which lender is nearly impossible to do.
As a first step, the least that RBI and Cibil can do is organise the publicly available information in a way that is actually useful.
The legal position
The legal view, of course, is far more complex. To understand the position that the RBI has taken in the past, we look at a December 2015 SC judgement pertaining to instances in which the central bank had denied information sought under the Right to Information Act. (Read the full judgement here: http://bit.ly/1TrXf82. ) The cases had been consolidated for the consideration of the SC.
In its judgement, the SC said that the main issue under its consideration was “whether all the information sought under the Right to Information Act, 2005 can be denied by the Reserve Bank of India and other Banks to the public at large on the ground of economic interest, commercial confidence, fiduciary relationship with other Bank on the one hand and the public interest on the other.”
In arguing its position, the RBI had said that the information it collects from banks is collected in a fiduciary capacity. The court, however, did not buy this. It stated that inspection reports, statements of banks and information related to banking business obtained by the RBI is not under the pretext of confidence or trust and hence does not fall within the definition of “fiduciary responsibility”.
“By attaching an additional “fiduciary” label to the statutory duty, the Regulatory authorities have intentionally or unintentionally created an in terrorem effect,” the court had said.
The court went on to say that the RBI is supposed to uphold public interest and not the interest of individual banks. “RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country’s economy and the banking sector. Thus, RBI ought to act with transparency and not hide information that might embarrass individual banks. It is duty bound to comply with the provisions of the RTI Act and disclose the information sought by the respondents herein,” the court had concluded.
The court, as part of its order, had also said that if information about private companies collected by public agencies is sought under the RTI Act, the public body is liable to provide such information to the public.
Finally, in a stinging rebuke, the court said, “RBI’s argument that if people, who are sovereign, are made aware of the irregularities being committed by the banks then the country’s economic security would be endangered, is not only absurd but is equally misconceived and baseless.”
Given the position taken by the courts in December and now again this week, it is important for the RBI to clarify its position regarding releasing information it collects from banks to the public. This includes information it collects about defaulters. If anything, sharing some of this information publicly may help RBI’s efforts to restore “the sanctity of debt contracts in India”, which, as RBI governor Raghuram Rajan said in a speech in 2014, has been eroded by large borrowers in recent years.
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